Chapter 23: Accounting Chapter 23: Accounting for Notes & Interest for Notes & Interest

By: Audrey MarshallBy: Audrey Marshall

For For

Advanced Accounting Advanced Accounting

Promissory NotesPromissory Notes Promissory note:Promissory note: a written and signed promise to pay a written and signed promise to pay

a sum of money at a specified timea sum of money at a specified time InterestInterest: an amt. paid for the use of money for a period : an amt. paid for the use of money for a period

of timeof time

Principal x interest rate x time as a = interest for Principal x interest rate x time as a = interest for fraction of year fraction of year fraction of year fraction of year

Maturity Value: Maturity Value: the amt. that is due on the maturity the amt. that is due on the maturity date of a notedate of a note

Principal + Interest = Maturity ValuePrincipal + Interest = Maturity Value

Maturity DateMaturity Date is calculated by counting the exact is calculated by counting the exact number of daysnumber of days

Example: A 90-Day note dated March 13 is due on June 11.Example: A 90-Day note dated March 13 is due on June 11.

Notes PayableNotes Payable Current liabilities: Current liabilities: liabilities due within a liabilities due within a

short time, usually within a yearshort time, usually within a yearExample: March 13 Signed a 90-Day, 10% note, $5,000.00. Example: March 13 Signed a 90-Day, 10% note, $5,000.00.

Receipt No. 302.Receipt No. 302.

-You would write the acct. title, Notes Payable, in -You would write the acct. title, Notes Payable, in corresponding column and debit Cash and credit Notes corresponding column and debit Cash and credit Notes Payable in the Cash Receipts journal.Payable in the Cash Receipts journal.

Interest Expense:Interest Expense: the interest accrued on the interest accrued on money borrowed money borrowed

Example: June 11. Paid cash for the maturity value of the Example: June 11. Paid cash for the maturity value of the March 13 note: principal, $5,000.00, plus interest, March 13 note: principal, $5,000.00, plus interest, $125.00; total, $5,125.00. Check No. 627.$125.00; total, $5,125.00. Check No. 627.

-You would debit Notes Payable and Interest Expense and -You would debit Notes Payable and Interest Expense and credit Cash in the Cash Payments journal.credit Cash in the Cash Payments journal.

Notes Payable Notes Payable (cont.)(cont.)

A business may ask for an extension of time if A business may ask for an extension of time if it is unable to pay an account when due so the it is unable to pay an account when due so the business signs a note payable.business signs a note payable.

Example: April 5. Winning Edge signed a 60-day, 18% note to Example: April 5. Winning Edge signed a 60-day, 18% note to Pollard Supply for an extension time on its account payable, Pollard Supply for an extension time on its account payable, $3,000.00. Memorandum No. 47.$3,000.00. Memorandum No. 47.

-You would debit Accounts Payable and Pollard Supply and credit -You would debit Accounts Payable and Pollard Supply and credit Notes Payable in the General journal.Notes Payable in the General journal.

Paying a note payable issued for an extension Paying a note payable issued for an extension of timeof time

Example: June 4. Paid cash for the maturity date value of the note Example: June 4. Paid cash for the maturity date value of the note payable to Pollard Supply: principal, $3,000.00, plus interest, payable to Pollard Supply: principal, $3,000.00, plus interest, $90.00; total, $3,090.00. Check No. 615.$90.00; total, $3,090.00. Check No. 615.

-You would debit Notes Payable and Interest Expense and credit -You would debit Notes Payable and Interest Expense and credit Cash in the Cash Payment journal. Cash in the Cash Payment journal.

Notes ReceivableNotes Receivable Notes Receivable: Notes Receivable: promissory notes that a promissory notes that a

business accepts from customersbusiness accepts from customersExample: April 22. Accepted a 90-Day, 18% note from Peter Example: April 22. Accepted a 90-Day, 18% note from Peter

Ange for an extension of time on his account, $1,000.00. Ange for an extension of time on his account, $1,000.00. Notes Receivable No. 7.Notes Receivable No. 7.

-You would debit Notes Receivable and credit Accounts -You would debit Notes Receivable and credit Accounts Receivable and Peter Ange account in the General journal.Receivable and Peter Ange account in the General journal.

Interest Income: Interest Income: the interest earned on the interest earned on money loaned money loaned

Example: July 21. Received cash for the maturity value of Notes Example: July 21. Received cash for the maturity value of Notes Receivable No. 7, a 90-day, 18% note: principal, $1,000.00, Receivable No. 7, a 90-day, 18% note: principal, $1,000.00, plus interest, $45.00; total, $1,045.00. Receipt No. 484.plus interest, $45.00; total, $1,045.00. Receipt No. 484.

-You would debit Cash and credit Notes Receivable and -You would debit Cash and credit Notes Receivable and Interest Income in the Cash Receipts journal. Interest Income in the Cash Receipts journal.

Notes Receivable Notes Receivable (cont.)(cont.)

Dishonored note: Dishonored note: a note that is not paid a note that is not paid when duewhen due

Example: May 15. Pam Carter dishonored Example: May 15. Pam Carter dishonored Note Receivable No. 9, a 90-day, 18% Note Receivable No. 9, a 90-day, 18% note, maturity value due today: principal, note, maturity value due today: principal, $400.00; interest, $18.00; total, $418.00. $400.00; interest, $18.00; total, $418.00. Memorandum No. 85.Memorandum No. 85.

-You would debit Accounts Receivable and -You would debit Accounts Receivable and Pam Carter account and credit Notes Pam Carter account and credit Notes Receivable and Interest Income.Receivable and Interest Income.